Corporate Governance of Banks in Libya

Ali Elfadli

• Publisher: De Gruyter Oldenbourg
• Year: 2019
• eBook ISBN: 9783110599657
• Edition: 1
• Topic: Business
• Subtopic: Middle Eastern History
• Index: Business

This book represents a response to a relative lack of academic research into corporate governance and especially corporate governance disclosure in the Middle East and North Africa (MENA). Specifically, the author explores recent developments in corporate governance disclosure produced by Libyan commercial banks. Along with other corporate governance mechanisms, disclosure plays an essential role in discharging accountability to and protecting shareholders, enhancing corporate performance and reducing the risk of financial crises. In order to improve corporate governance disclosure, it is necessary to understand the context in which it takes place. The MENA countries have unique characteristics, and those involved in the Arab Spring have been affected in different ways. This book provides up to date research into corporate governance disclosure in the context of Libya following the Arab Spring. The banking sector plays a crucial role in the Libyan economy and has specific characteristics which make corporate governance more important than in other sectors, yet research in this sector is rare. Furthermore, the banking sector in Libya has seen significant corporate governance reforms in recent years. As one of the most significant oil producing countries, Libya's political and business environments have been dramatically affected by the Arab Spring. The author discusses how banks have responded to these reforms and the ways in which their corporate governance disclosure has evolved.

1 Introduction

Sound corporate governance is essential within the business environment. Weak corporate governance has led to the failure of many companies around the world, with the result that it has become a growing matter of concern at the global level. One of the most important principles of corporate governance is disclosure (Hawkamah and IFC 2008, OECD 2004); along with other practice, it plays a vital role in ensuring accountability between shareholders, directors and managers. Hawkamah and IFC (2008) argue that a lack of disclosure makes it difficult for shareholders and other stakeholders to monitor the board of directors and managers. This is echoed in the OECD Principles (2004), which assert that the better the quality of disclosure, the less chance there is of corruption in a company or sector. UNCTAD (2011) also sees corporate governance disclosure as playing an important role in ensuring markets function properly.

However, whilst international corporate governance codes acknowledge the importance of disclosure and practice, they tend to ignore the impact that the domestic environment has on these principles. This is problematic, given that developing countries vary from developed countries, and indeed from each other, in terms of their institutional environment. Researchers have responded in recent decades by investigating the role the institutional environment plays in shaping corporate governance disclosure and practice (Grecco, FM Filho, Segura, Sanchez, and Dominguez 2013; Khadaroo and Shaikh 2007; Oliveira, Ceglia, Lima and Ponte 2014). This research monograph seeks to contribute to the ongoing discussion by focusing on corporate governance disclosure in the Libyan banking sector, where the institutional context differs from that in both other developing and developed countries.

The banking sector was chosen as its corporate governance arrangements are set out in law (Lundgren and Catasús 2000) and it is subject to close scrutiny by a range of stakeholders. The sector plays a significant role in the Libyan economy; not only does it account for 50% of all companies listed on the Libyan Stock Market (LSM), but it provides assistance to companies in other sectors by advancing them loans (CBL 2009). Significant reforms have been implemented in the sector over the last decade or so, including the development of a privatization policy and the issuing of first a voluntary (in 2006) and then mandatory (in 2010) corporate governance code by the Central Bank of Libya (CBL). However, despite these reforms and the dramatic changes that have taken place in Libyan culture since the 2011 Arab Spring, very little research has been conducted into corporate governance in this or any other sector in Libya (Larbsh 2010; Magrus 2012; Zagoub 2011). The few studies that have emerged indicate that corporate governance in Libya is still in its infancy. To the best of the author’s knowledge, no research has been conducted specifically into corporate governance disclosure within the banking sector. This is, therefore, the focus of this research monograph. The book considers how Libyan commercial banks (LCBs) are responding to national and international corporate governance disclosure requirements.

Understanding how corporate governance operates in emerging societies is crucial to understanding the underlying causes of financial turmoil in these societies (Mitton 2002). As one of the Middle East and North Africa (MENA) countries, Libya shares a number of cultural characteristics (e.g. language, religion and attitudes towards kinship) with its MENA neighbours that distinguish it from developed countries, and affect its approach to corporate governance. At the same time, it differs from its neighbours in that this approach has also been shaped by 42 years of the Gaddafi regime, and by great mineral wealth (Libya produces 1.8 million barrels of oil per day). It is both interesting and useful to understand how corporate governance operates in such a country, which has undergone so much change in recent years. Although clearly the political upheaval in Libya affects all aspects of people’s lives as well as the ability of businesses to function, the role of corporate governance in assuaging difficulties and in improving the redevelopment of businesses is crucial and requires research in order to assess its effectiveness in enhancing the business environment as well as ultimately leading to societal improvements.

There is a need to improve corporate governance, especially those aspects related to disclosure, in banks in developing countries. Enhanced disclosure enhances transparency and transparency is a cornerstone of effective governance and accountability (Solomon 2013). This need is particularly urgent in Libya’s case as the government has initiated a series of reforms designed to encourage private investment by domestic and foreign shareholders, including the establishment of the LSM in 2006 and the privatization of numerous state-owned enterprises. The dramatic cultural changes that have taken place in some MENA countries, including Libya, as a result of the Arab Spring, also render this research monograph important. Even before the crisis, MENA countries suffered from poor access to finance and a lack of foreign direct investment, and since January 2011, foreign direct investment and market confidence have shown further decline. More than ever, as they embark upon the post-conflict process of transition, these countries need help with corporate governance (IFC 2015). This is especially true in Libya which, unlike its neighbours, Egypt and Tunisia, has seen the Arab Spring revolution give way to war, and national division has fractured its institutions.

There are very few studies investigating corporate governance disclosure and practice in MENA countries, especially in the banking sector, even though this sector has unique characteristics and plays a significant role in the economy of all MENA countries. In Libya, Larbsh (2010) investigated corporate governance practice in Libya from a stakeholder perspective but did not focus on any one industry or corporate governance code. Magrus (2012) examined corporate governance practice in Libyan listed companies following the introduction of the LSM’s 2007 code, while Zagoub (2011) investigated how institutional pressures (as evidenced in a tendency towards isomorphism) impact on corporate governance practice in LCBs. However, even since these studies were undertaken, Libyan culture has undergone further fundamental change and more reforms have been implemented in the banking sector, including the introduction of the mandatory corporate governance code (CGLBS2010).

This book contributes to our knowledge by narrowing the literature gap regarding corporate governance disclosure and practice in banking sectors in MENA countries. As mentioned earlier, there is a paucity of research in this area (Darmadi 2013; Feldioreanu and Seriaa 2015; Nwakama, Okereke and Arewa 2011; Thomas and Boolaky 2009; Union of Arab Banks 2007); in Libya’s case, there has been no study of corporate governance disclosure and practice in the banking sector since the banking reforms and the significant change in Libyan culture. This research monograph provides information regarding the development of corporate governance disclosure and practice in LCBs since these changes. It gives insights into the level of corporate governance disclosure being offered by Libyan banks, thereby allowing comparison with corporate governance disclosure levels in other developing and developed countries.

The book thus enriches our knowledge by providing evidence of the advances that have been made in the sector in regard to corporate governance disclosure over recent years and by giving an insight into how LCBs are responding to the reforms.

This research monograph sheds light on issues that have been neglected by previous corporate governance disclosure and practice studies, such as the impact of the political and social context on this disclosure and practice. Thus, the research opens a door to further research into corporate governance disclosure and practice in Libya as well as in other MENA countries. This book addresses a gap in the academic literature by investigating corporate governance from a context whose institutional environment differs in key ways from those in both developed and other developing countries.

Lastly, the book provides policy implications for those regulators and policy makers in Libya who are concerned with corporate governance in LCBs. It suggests steps policy makers can take to improve practice not just in the banking sector but across Libya’s business environment as a whole.

The book is divided into six chapters. Chapter 2 discusses corporate governance in general terms, including its importance in the banking sector, before focussing specifically on the disclosure requirements. It reviews the existing literature pertaining to corporate governance disclosure and practice in the banking sectors of MENA countries generally and then in Libya.

Chapter 3 presents an overview of the Libyan environment, including the political, economic, religious and cultural context. This context is important as it provides the framework within which the observations of this study should be interpreted and understood. The chapter discusses Libya’s uniqueness among its Arab Spring neighbours before describing the development and current structure of the LBS and proffers a critical review of corporate governance initiatives undertaken so far. The discussion seeks to provide a holistic picture of how the corporate governance principles, including those governing disclosure and transparency, are accommodated within Libya’s current legislative/regulatory framework, including any points of difference between Libya’s various corporate governance codes and between Libya’s framework and those in developed countries.

Chapter 4 presents the theoretical framework of corporate governance. The chapter discusses the traditional theoretical approaches to corporate governance and disclosure before focusing on institutional theory, a theoretical framework that seems to fit the institutional environment under study as well as providing a novel perspective to corporate governance in a MENA economy. The chapter introduces the main institutions that may have an impact on corporate governance disclosure and practice: the bureaucratic state, religion, kinship, the market, politics and the law.

Chapter 5 presents an empirical study of corporate governance disclosure of LCBs and presents the findings from the analysis of LCBs’ annual reports and websites. Drawing on each bank’s most recent available annual report and/or website (at the time the research was conducted), the empirical research provides a descriptive analysis of corporate governance disclosure performance across the sample as a whole and identifies the level of disclosure in each of the information categories in the ISAR benchmark. Thus, the findings offer an initial overview of recent practice in Libyan commercial banks and the factors that may be shaping this practice. The chapter then compares the disclosure performance of LCBs with that of companies in other developing countries, before analysing the individual disclosure performance of eleven of the sixteen banks, as revealed in websites and annual reports disclosed over the last ten years.

Chapter 6 discusses the findings in the context of the existing literature, concluding that the results are broadly in line with those of other corporate governance studies conducted in developing countries and suggesting that these results provide the most up-to-date picture we have of recent improvements in corporate governance disclosure in Libya. The chapter summarizes the findings of the study and highlights the ways in which the research contributes to existing knowledge. The chapter considers the theoretical and practical implications of the findings before discussing the limitations of the research and offering suggestions for future study.

2 Corporate Governance Disclosure

2.1 Introduction

This chapter provides a review of the literature on corporate governance relevant to the current study. The review focuses on six main areas: defining corporate governance and exploring its importance (and the importance of disclosure and transparency) in the banking sector; reviewing the empirical literature relating to the development of corporate governance in the banking sectors of developed, developing and MENA countries.

The chapter is organized as follows. Section 2.2 discusses the various ways in which corporate governance has been defined and considers its importance. Section 2.3 then focuses on its importance specifically within the banking sector. Section 2.4 reviews the empirical literature relating to the emergence of corporate governance in developed countries (the UK and the US), while Section 2.5 discusses its emergence in developing countries. corporat...

Table of contents

• Title Page
• Copyright
• Contents
• 1 Introduction
• 2 Corporate Governance Disclosure
• 3 The Libyan Context
• 4 The Corporate Governance Theoretical Framework
• 5 Analysis of Annual Reports and Websites of LCBs
• 6 Discussion and Conclusion
• References
• List of Abbreviations
• Index